BU204_Krugman_Chapter 04

BU204_Krugman_Chapter 04 - > The Market Strikes Back B I G...

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chapter >> EW YORK CITY IS A PLACE WHERE YOU can find almost anything—that is, almost anything, except a taxicab when you need one or a decent apartment at a rent you can afford. You might think that New York’s notorious shortages of cabs and apartments are the inevitable price of big-city living. However, they are largely the product of government policies—specifically, of gov- ernment policies that have, one way or another, tried to prevail over the market forces of supply and demand. In the previous chapter, we learned the prin- ciple that a market moves to equilibrium— that the market price rises or falls to the level at which the quantity of a good that people are willing to supply is equal to the quantity that other people want to demand. But some- times governments try to defy that principle. When they do, the market strikes back in predictable ways. And our ability to predict what will hap- pen when governments try to defy supply and demand shows the power and usefulness of supply and demand analysis itself. The shortages of apartments and taxi- cabs in New York are particular examples that illuminate what happens when the logic of the market is defied. New York’s housing shortage is the result of rent con- trol, a law that prevents landlords from raising rents except when specifically The Market Strikes Back BIG CITY, NOT-SO-BRIGHT IDEAS 83 4 New York City: An empty taxi is hard to find. PNI Ltd./Picture Quest N given permission. Rent control was intro- duced during World War II to protect the interests of tenants, and it still remains in force. Many other American cities have had rent control at one time or another, but with the notable exceptions of New York and San Francisco, these controls have largely been done away with. Similarly, New York’s limited supply of taxis is the result of a licensing system introduced in the 1930s. New York taxi licenses are known as “medallions,” and only taxis with medallions are allowed to pick up passengers. And although this system was originally intended to protect the interests of both drivers and cus- tomers, it has generated a shortage of taxis in the city. The number of medallions remained fixed from 1937 until 1995, and only a handful of additional licenses have been issued since then. What you will learn in this chapter: The meaning of price controls and quantity controls, two kinds of government intervention in markets How price and quantity controls create problems and make a market inefficient Why economists are often deeply skeptical of attempts to inter- vene in markets Who benefits and who loses from market interventions, and why they are used despite their well- known problems What an excise tax is and why its effect is similar to a quantity control Why the deadweight loss of a tax means that its true cost is more than the amount of tax revenue collected
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84 PART 2 SUPPLY AND DEMAND Why Governments Control Prices You learned in Chapter 3 that a market moves to equilibrium—that is, the market price moves to the level at which the quantity supplied equals the quantity demanded.
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BU204_Krugman_Chapter 04 - > The Market Strikes Back B I G...

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